New EADS Rules Should Speed Mergers, Other Deals

Dec. 8, 2012 - 11:59AM
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PARIS — A new shareholder deal for EADS that limits government intervention while bringing Germany in as a shareholder alongside France will likely accelerate mergers, acquisitions and joint venture deals for the European aerospace and defense company, experts said.

The new agreement and governance reform, announced Dec. 5 and lauded by investors and analysts, are responses to long-stated intentions of German and French shareholders Daimler and Lagardère to sell their EADS stakes and focus on the auto and media businesses, respectively.

The move to strip away the possibility of a government veto under the reform can be called the “Enders clause,” reflecting Chief Executive Tom Enders’ insistence on rejecting state intervention in the running of EADS.

Enders had “a frank exchange” of views when he met President François Hollande on the morning of Dec. 5 to discuss the shareholder plan, a source briefed on the agreement said.

France holds 15 percent in EADS and has opted to cut its votes to 12 percent, equal to the stake Germany will buy under the shareholder plan.

EADS shares rose as much as 9 percent Dec. 6 and were up 7.11 percent in early afternoon trading, at 29.17 euros per share.

Some of that gain reflected relief EADS will spend an estimated 3 billion euros ($3.9 billion) to buy back and cancel 15 percent of its shares that would otherwise come into the market and depress stock prices as Lagardère and Daimler sell their shares.

A senior French politician welcomed the shareholder agreement after Berlin’s recent shoot-down of a megamerger plan between BAE Systems and EADS.

“That led everything to grind to a halt,” said Patricia Adam, chair of the defense committee at the National Assembly, the lower house. Adam also sits on the panel drawing up the French defense and security white paper.

“It’s a way of getting things off the ground again,” she told the aerospace press club Dec. 6. “Credibility and confidence have to be rediscovered.”

Relations between Berlin and Paris had been strained under the previous French administration, and confidence had to be rebuilt, she said. With defense cuts spread across Europe, cooperation is needed in areas such as training, equipment and industry, she said. The EADS deal is a “positive element,” she said.

In the EADS pact, Germany will buy a direct 12 percent stake in the European aerospace and defense company, allowing Berlin to hold equal footing with Paris, which is reducing its stake from 15 percent to 12 percent. The state-owned KfW bank will acquire the stock.

“France and Germany intend to build equal ownership positions, while the present core industrial shareholders, Daimler AG and Lagardère SCA, are provided with a path to partially divest and will eventually be free to trade their shares at their discretion,” EADS said in a Dec. 5 statement.

A 12 percent cap on state ownership for both France and Germany and 4 percent stake for Spain avoids breaching the 30 percent level, which requires making an open bid for the company under Dutch company law.

Lagardère, a family-controlled company, said in a statement it welcomed the agreement, which will deliver “normal governance” and allow the company to sell the bulk of its EADS stock. The number of EADS shares on the market will rise to more than 70 percent compared with 49 percent.

A day after the share agreement was announced, Daimler sold half of its 15 percent stake in EADS, raising 1.66 billion euros ($2.2 billion).

Positive For M&A Deals

Daimler acted as a proxy shareholder for the German government, which really made the decisions.

That was made clear when Berlin, which did not own EADS stock, still rejected the merger with BAE, partly because of concerns of preserving German defense industrial interests.

The new plan will accelerate smaller merger-and-acquisition and joint venture deals, as the governments want EADS to develop, Chopard said. There are opportunities in defense, with many small high-technology companies, as well as in services for aeronautics, he said.

François Lureau of consulting firm EuroFLConsult, and former head of the French procurement office, agreed with the prospect for M&A deals.

With Daimler and Lagardère leaving as core shareholders, it will be easier for EADS managers to acquire companies.

Lagardère is understood to have vetoed a major U.S. acquisition years ago, and two others also failed to get a green light.

EADS has a cash mountain of 8 billion euros, of which an estimated 3 billion will be used in the buyback program.

German ownership, direct or indirect, will not be a big factor for the military side, as defense assets are protected by European law, said Zafar Khan, market analyst at brokerage Société Générale. The rise in shares in the open market is a positive, he said.

The management says the new structure gives greater autonomy to manage the group, but Khan was cautious.

“We will see if this is true,” he said.

It is unlikely EADS will do any M&A deals while a strategic review is underway, he said. The review, launched after the collapse of the BAE merger plan in October, could be completed in six months, he said.

The EADS managers needed to get back on the front foot after the BAE deal crashed.

“They made a reasonable, good effort” at a two-day investor forum Dec. 3 and 4, he said.

As part of the message of delivering value to shareholders, EADS set a target of 10 percent operating profit by 2015, with each division head outlining plans to hit that goal, Khan said.

German Pragmatism

The shareholder plan signals Germany’s pragmatism in the face of Daimler’s exit, Lureau said. Paris cutting its votes from 15 to 12 percent to equal Berlin’s shows “each is taking a step toward the other,” he said.

“This is one of the positive consequences of the collapse of the BAE-EADS merger,” he said.

Another positive: State holdings fall from 49 to below 30 percent, while France continues to protect its special interest, nuclear deterrence.

Under the new plan, EADS will create a French and German national defense company to protect sensitive military assets.

“EADS is moving to a normal regime for a defense company,” Lureau said.

Berlin’s stake purchase reflects a strategic decision to preserve the defense industrial and technology base in Germany, said Pierre Conesa, an independent consultant.

German Chancellor “Angela Merkel blew up the merger with BAE, and Germany is now raising its stake in EADS. It looks like a country that is becoming normal,” Conesa said.

Hollande welcomed the agreement.

“This new agreement protects the interests of France, Germany and Spain while giving the company the freedom to maneuver it needs to pursue its development,” Hollande said in a statement.

EADS confirmed its headquarters would be in Toulouse, southwest France, and it would maintain head offices of space division Astrium, airliner maker Airbus and Eurocopter in France, while defense and security unit Cassidian will be based in Germany, Hollande said.

“We are making a big leap forward in terms of governance — actually, the most important change since the creation of our company more than 12 years ago,” Enders said.